US-based Silicon Valley Bank (SVB) has been shut down by regulators and its assets have been seized, according to the Federal Deposit Insurance Corporation (FDIC). The sudden shutdown of Silvergate Capital Corp and the unmindful fundraising of SVB had created panic in the tech industry, leading to a downturn in the start-up industry.
What is SVB and what services does it provide?
SVB operates as a full-service bank that accepts deposits, makes loans as well as provides treasury management, banking across international borders, online banking, foreign exchange trade, and multiple other services. This bank is known to serve customers across the world.
What triggered the crisis at SVB Financial Group and Silicon Valley Bank?
The SVB crisis originated after its parent organisation, the SVB Financial Group, announced a sale of $21 billion of its securities that were a part of its portfolio, along with which it mentioned that it held a sale of shares amounting to $2.25 billion to shore up its finances.
This move was prompted due to high deposit outflows at the bank caused by a downturn in the start-up industry. The bank also reported a decline in the net interest income.
What impact did the crisis have on SVB?
Following the capital offering, the bank's stock fell 60 percent leading to a loss of $80 billion. The bank attempted to pacify the venture capitalists stating that their money was safe. SVB shares suffered their worst drop in about 35 years on Thursday.
How is SVB attempting to salvage the business in the wake of the crisis?
In an attempt to salvage the business, SVB Chief Executive Officer Greg Becker held a conference call with the clients of SVB and venture capital investors of the bank, requesting them to 'stay calm' in the hope of not having to face further withdrawals.
In a letter to multiple shareholders on Wednesday, he said, “We are taking these actions because we expect continued higher interest rates, pressured public and private markets, and elevated cash-burn levels from our clients as they invest in their businesses.”
What was the reaction of venture capital firms to the crisis at SVB, and what instructions did they give to portfolio businesses?
According to a report in Money Control, venture capitalists such as Peter Thiel Founder’s Fund, Coatue Management, and Union Square Ventures gave instructions to portfolio businesses to minimize their exposure towards SVB and withdraw their cash from the banks. Other venture capital firms have also instructed portfolio companies to shift some of their capital from the bank.
How are startups responding to the crisis, and what sense of fear is there in the industry about similar situations happening in the future?
Many startup companies have now begun withdrawing their funds from SVB and are simultaneously looking for other lenders to park their cash. On the side, there is a sense of fear about who is next in line to face a similar situation.
What is the possible solution?
Bill Ackman, the founder of Pershing Square, has suggested a 'highly dilutive' bailout of SVB Financial Group by the US government if a private capital solution cannot be provided, stated a report in Money Control. Companies backed by venture capital use SVB both for loans and operating cash, and a failure of the firm could destroy a crucial long-term impulse for the economy, he said in a series of tweets. The government could also choose to guarantee deposits in exchange for warrants to enable the company to raise new funds.
